Ch. 1, Equity Securities | Day 5 Flashcards
(15 cards)
What is the role and liability of a general partner in a limited partnership?
The general partner manages the business and holds unlimited liability for the partnership’s obligations. They can buy/sell property, receive compensation, and enter contracts but must not commingle funds, compete with the partnership, or borrow from it.
What minimum financial interest must a general partner maintain in the partnership?
At least 1% of the financial interest in the partnership.
Name the six characteristics of a corporation that a DPP must avoid at least two of to receive favorable tax treatment.
1) Continuity of life, 2) Profit motive, 3) Central management, 4) Limited liability, 5) Associates, 6) Freely transferable interest.
Which two corporate characteristics are easiest for a DPP or LP to avoid?
Continuity of life and freely transferable interest.
What document forms the foundation of a limited partnership, and what does it include?
The partnership agreement; it includes terms, business purpose, and authority of the general partner.
What must be filed in the state of formation before a limited partnership can be created?
A certificate of limited partnership, which includes the name/address, business description, life of the partnership, and partner conditions.
What triggers the need to update the certificate of limited partnership?
A material change to any condition listed in the certificate, which must be updated within 30 days.
What documents must an investor receive in a public vs. private offering of an LP?
In a private placement, a private placement memorandum; in a public offering, a prospectus.
What is the role of a syndicator in offering limited partnerships?
A syndicator structures and files partnership documents for public offerings and may receive a fee up to 10% of the offering.
What is a subscription agreement and what must it include?
A document signed by prospective limited partners; includes power of attorney, net worth, income, and acknowledgment of risks.
Name three common purposes for organizing a limited partnership.
1) Real estate investment, 2) Oil and gas exploration, 3) Equipment leasing.
What is the major difference between tax deductions and tax credits in LPs?
Tax deductions reduce taxable income; tax credits reduce tax liability dollar-for-dollar.
What are the two types of loans LPs may take, and how do they impact liability?
Nonrecourse loan (no liability for LPs) and recourse loan (LPs are liable); recourse loans affect cost basis.
What are key factors an investor should consider before investing in an LP?
Economic viability, tax treatment, management ability, liquidity, time horizon, blind vs. specified pool, and internal rate of return.
What is the priority of payment when dissolving a limited partnership?
1) Secured lenders, 2) General creditors, 3) Limited partners’ profits and return, 4) General partner’s fees, profits, and return.
